The U.S. auto industry is facing tough times this year given higher interest rates, rising vehicle prices and the looming threat of tariffs on European and Japanese auto imports. After rising 1.8% in the first six months, auto sales fell 4% in the third quarter despite strong demand for SUVs and some pickups.

Of the six major American and Japanese automakers, sales at General Motors (GM - Free Report) declined the most, plunging 11% in the third quarter, followed by decreases of 10% for Fiat Chrysler (FCAU - Free Report), 9% for Nissan Motor (NSANY - Free Report), 6% for Toyota Motors (TM - Free Report), 5% for Honda Motors (HMC - Free Report) and 4% for Ford Motors (F - Free Report).

Notably, auto sales were down 7% in September partly due to a decline in sales in areas hit by Hurricane Florence and a tough year-over-year comparison as consumers rushed to replace vehicles damaged by Hurricane Harvey last year.

More Pain Ahead?

Consumers have long been shifting from traditional passenger cars to larger and more comfortable pickup trucks, SUVs and crossovers. But the number of new models is now growing faster than demand, threatening the fat profits that automakers have enjoyed over the past several years. Additionally, higher rates have made financing of new vehicles expensive. Further, new tariffs on imported steel and aluminum may deal a big blow to the industry as these would increase the cost of auto production. The potential tariffs on cars and auto components are also the big threats to the auto industry.

However, a new trilateral agreement among the United States, Mexico, and Canada, which will govern $1 trillion worth of trade, will likely ease uncertainty in the industry. Additionally, 18-year high consumer confidence, a strong job market, and a booming economy will propel sales in the months ahead. Tax cuts are providing a lift to consumers’ spending power, leading to higher demand for vehicles.

Further, the auto sector has a compelling valuation with a P/E ratio of 10.43, the lowest of all the 16 Zacks sectors. This could provide an upside to the stocks this year. That said, we have highlighted the pure play auto ETF & a few stocks that could be attractive picks.

First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report)

This fund offers global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is moderately concentrated on the firms in its basket, with each making up for no more than 8.1% share. CARZ has a lower level of $18.1 million in AUM and trades in a small average daily trading volume of about 5,000 shares. The product charges 70 bps in fees per year and carries a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Allison Transmission Holdings Inc. (ALSN - Free Report)

Based in Indianapolis, IN, Allison Transmission is engaged in the manufacturing of fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. The stock has estimated earnings growth rate of 66.54% for this year. It sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. 

Cooper-Standard Holdings Inc. (CPS - Free Report)

Based in Novi, MI, Cooper-Standard operates as a supplier of systems and components for the automotive industry. Its products include sealing and trim, fuel and brake delivery, fluid transfer, thermal and emissions, and anti-vibration systems. The stock has an expected earnings growth rate of 9.66% for this year. It has a Zacks Rank #2 (Buy) and VGM Score of A.

LKQ Corporation (LKQ - Free Report)

Based in Chicago, IL, LKQ is a leading provider of alternative and specialty parts to repair and accessorize automobiles and other vehicles. The company offers a wide variety of replacement systems, components, equipment, and parts to repair and accessorize automobiles, trucks, and recreational and performance vehicles. The stock has an estimated earnings growth rate of 21.81% for this year. It has a Zacks Rank #2 and VGM Score of B.